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The three papers presented at this session have provided a fine balance of theoretical analysis and statistical investigation. The paper by Black and Scholes is a particularly commendable contribution, thoroughly professional in execution and a very constructive piece of work in its broader implications. The authors has previously derived an equation for the valuation of options from the condition that opportunities for profitable arbitrage will be eliminated in efficient capital markets. In the present paper they carefully analyze a sizeable body of data to examine the efficiency of the operation of the option market as it is now structured. They validate their formula for the pricing of options by showing that in the absence of transactions costs, buying "undervalued" contracts and selling "overvalued" contracts at model prices computed with foreknowledge of the actual variances of the returns on the underlying stock over the holding period would produce quite insignificant average gains or losses. But when ex ante variances are estimated from previous stock price histories, buying "undervalued" contracts and selling "over-valued" contracts at model prices would have produced significantly negative excess portfolio returns, while substantial positive excess portfolio returns would have been made by buying overvalued and selling undervalued options at market prices. These results indicated that the true value of options is somewhere midway between market prices and "model" prices based on historical data. [ABSTRACT FROM AUTHOR]

The article discusses the issues concerning the transport policy in Great Britain. The formation of transport policy has been and still is a confused world of ideology, interest, economics and several adjustment for political gain. A product of this complex system of interaction has been the Transport Holding Inc. The functions of the holding company are mainly concerned with investment business and the handling of the central pool of capital. The organization and structure of Transport Holding is presented. The company emerges as an interest group attempting to influence decision making, in a very similar way to the more commonly accepted private groups.

This paper has introduced L(W[sub 0], k, A) and R(W[sub 0], k, A) as three-parameter risk measures embodying decisions about a reference level about which deviations are to be measured, the relative importance of small versus large deviations, and the range of deviations that will be included in the risk measure. The popular risk measures of variance, semi-variance, mean absolute deviation, and probability of an outcome worse than some prespecified level are special cases of L(W[sub 0], k, A) and standard deviation is a special case of R(W[sub 0], k, A). These risk measures were shown to differ in their choice of one or more of the parameters W[sub 0], k, and A. It was shown that both L and R are monotone increasing functions of A; however, neither L nor R are necessarily monotone increasing functions of k. Clearly L(W[sub 0], k, A) and R(W[sub 0], k, A), are not the only potentially useful functions of the three decision parameters that have been implicit in the selection of the popular risk measures; they are, however, a rich and fairly general family. Further study of their properties should lead to advances in the theory of risk and specification of criteria for the selection of risk measures. This paper has attempted to establish a foundation for these advances. [ABSTRACT FROM AUTHOR]

A conference paper is presented that examines firm income taxation and asset expansion. The author explores some of the problems associated with the measurement of asset expansion during periods of changing price levels. The author investigates the impact that changes in corporate income tax rates have on asset expansion and offers some suggestions on how to stimulate investments by means of special tax measures.

If papers presented at our annual meetings are not addressed to the small group of academicians who attend the actual programs, but to a much larger audience that includes decision makers in the field, then Dr. Pellatt's paper on the analysis of real estate investment opportunities represents a significant contribution. He has done a competent, intelligent job of applying capital budgeting theory to the problem of real estate investment. Admittedly, there is nothing new or unique in the tools, techniques, or concepts employed in his paper, but he has produced a worthwhile marriage. He brings together a potentially fruitful union of capital budgeting, where we have had significant progress in the last decade, with the field of real estate evaluation where we have had little change in the last century. [ABSTRACT FROM AUTHOR]

One of the most important problems confronting stock market analysts is the valuation of stocks at any point in time. In fact, the name of the game is to determine whether stocks are selling above or below their real worth. Presumably, "real worth" is synonymous with economic equilibrium based upon the "correct" model of common stock valuation. Deviations from equilibrium will eventually be corrected by the market mechanism and this is the stuff of which profits and losses are made. The purpose of this paper is to extend the work of Malkiel and Cragg since they have apparently opened up a rich vein of exploration in the quest to explain the structure of share prices. The most serious limitation of the Malkiel and Cragg study was its sample size. Unfortunately, the sample was restricted to only 178 corporations. The authors state "... our sample tends to contain the 'blue-chip' group of companies in which investment interest is centered.". Would it be possible to improve the market representativeness and size of the sample and still obtain the excellent results reported by Malkiel and Cragg? In addition to attempting to answer this question, this paper will also consider the role of industrial classification in determining price-earnings ratios holding important financial variables constant. Section II briefly reviews the stock evaluation model. Section III discusses the data source for this study. Section IV reports the regression results while Section V summarizes the findings. [ABSTRACT FROM AUTHOR]

Mao & Helliwill have two very ambitious objectives: (1) to present a new theoretical model in the area of investment and financing decisions under uncertainty and (2) to evaluate critically the current practices and suggest the directions future theoretical and empirical research on investment decisions can take. These objectives are not attainable by any single paper and M & H's attempt is no exception. By other more conventional standards, however, M & H have written an interesting paper. [ABSTRACT FROM AUTHOR]

Professor Ball's paper reports the results of an extremely detailed and exhaustive study of the effect on security prices of changes in accounting techniques affecting the reported net income figure. His contribution is both substantive, in that it provides further evidence in support of the efficient markets hypothesis, and methodological, in that it proposes refinements to the usual technique used to study the impact of new information on stock prices. I shall discuss these two aspects of his paper separately. The major finding of the paper is that capital markets are efficient to the extent that investors are able to see through the accountant's veil to derive independent estimates of the true economic income of firms. We may conclude from this that annual income reports do nothing to obstruct the flow of information from firm to investor, even if they do relatively little to facilitate it. However, it would be wrong to take this as implying that the principle of consistency in accounting is irrelevant' market efficiency is quite compatible with variations in investor sophistication, and it is possible that changes in accounting techniques lead to wealth transfers from the naive to the sophisticated, which would be widely regarded as undesirable. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to derive the three MM Propositions using the standard deviation-mean portfolio model in a market equilibrium context. This approach to some of the major issues of corporation finance enables us to derive these propositions in a somewhat more direct way than with the use of the risk-class assumption and the arbitrage proof of the MM paper. Instead, a model is substituted relating the maximization of stockholder expected utility to the selection of portfolios of assets to, finally, the financing and investment decisions within the corporation, A link will be provided between two branches of the field of finance that have so far been evolving more or less separately. [ABSTRACT FROM AUTHOR]

The article presents comments on the papers "The Changing Role of Banks in the Market for Equities," by A. James Meigs, and "Life Insurance Companies and the Equity Capital Markets," by Orson H. Hart, both published within the issue. The author discusses four separate points presented within the papers: the expected growth in the volume of institutionally managed funds, intensification of competition between institutions, innovations in the form of new services offered to firms or individuals, and the investment preferences of equities.

The article reports on alternative accounting rules and their effect on nonsubsidiary investments and discusses the paper, "The Effect of Alternative Accounting Rules for Nonsubsidiary Investments," by Nicholas Dopuch and David F. Drake. The choice among alternative measurement rules or income and wealth definitions is a continuing problem in accounting. One area of choice is the marketable securities of nonsubsidiary companies where cost basis valuation is typically employed. Dopuch and Drake measured the performance of each alternative accounting rule under appropriate criteria through a sample of 12 firms for the period of 1955-64.

This article presents a comment by Dale H. Gustafson on the article A New Concept of the Economics of Life Value and the Human Life Value: A Rationale for Term Insurance as the Cornerstone of Insurance Marketing by professors Juan B. Aponte and Herbert S. Denenberg (A-D), published in the September 1968 issue of the Journal of Risk and Insurance. Gustafson will quote four sentences from the paper that seem to clearly identify the implicit assumptions. The first one is the last complete sentence in column 1 on page 347: Income insurance plus medical expense insurance represents the complete life insurance portfolio for the individual The second one is the first full sentence in the next paragraph: The all-inclusive system would provide complete insurance for full insurable value against all contingencies. The third one is the sentence which begins at the bottom of column 2 on page 348: It should he realized, however, that investment life insurance is merely insurance with an investment adjunct. Finally, there is the last sentence in the second paragraph in column 1 on page 353: What is needed is savings, and it is strictly an investment decision as to the form this savings should take. Gustafson read into these sentences and the import of the whole article that the basic assumptions are that life insurance is concerned with the risk of death prior to retirement, and savings solely as an investment. Gustafson doubt that very many people associated with the life insurance business would agree with this as an exhaustive listing of the interests of life insurance. In the vernacular generally used in sales training materials, the mortality hazard that life insurance is concerned with is most often described as a two-faceted problem--the risk of dying too soon and the risk of living too long.

The article presents commentary about a paper written by Roman L. Weil, Joel E. Segall, and David Green, Jr. (WSG) entitled "Premiums on Convertible Bonds," which was published in the June, 1968 edition of the "Journal of Finance." In that paper WSG observed that the "floor" for convertible bonds contributes little, if anything, to the bond premium. The author of the current paper identifies and explains what he considers to be flaws in their reasoning. In his view it is not clear what contribution the floor makes to a convertible bond premium.

The mean-variance (EV) portfolio selection rule has recently been challenged by a new procedure referred to as the Stochastic Dominance Rule (SD), which is touted as being theoretically and empirically superior. However, the SD procedure suffers from at least one technical deficiency not associated with the EV model--the lack of a search algorithm that builds efficient combinations of assets. The purpose of this paper is to evaluate the significance of this problem and to consider procedures for its alleviation. [ABSTRACT FROM AUTHOR]

Selecting the best from among competing investment proposals is the most important financial decision problem faced by the managers of enterprises. It confronts every high-ranking decision-maker regardless of the nature of his organization's activity. Corporate executive, public official and university administrator alike must determine, with limited information, how much to invest in a variety of risky projects. Managers have been making these decisions since an overfed Australopithicus Robinson Crusoe decided to save a bone for a weapon rather than crack it for its marrow, but there still exists no fully-accepted objective procedure for optimal investment choice, even on a theoretical level where all problems of measurement are neglected. We believe, however, that the direction of research is dear and that a rapid rate of convergence toward an accepted capital budgeting procedure will soon become apparent. Our paper is intended as a single step (in the right direction). We have not solved the problem completely but we hope to have (a) clarified the remaining unsolved theoretical issues and (b) pointed the way toward practical interim techniques which approximate the exact procedures that will be found someday. [ABSTRACT FROM AUTHOR]

In this paper three contrasting assumptions about prior knowledge concerning mu and Sigma have been considered. It was shown that as increased uncertainty is introduced, the risk associated with a given portfolio increases, but that the portfolios identified as efficient in one case remain efficient in the other cases. Although the efficient set contains the same portfolios in all three cases, the map of the set in risk-return space shifts, and this shift causes a change in the portfolio identified as optimal. In cases with only limited prior information differences in the optimal portfolios may be significant and, therefore, should not be ignored. [ABSTRACT FROM AUTHOR]

This paper is part of our continuing analysis of common stock price fluctuations, which we call volatility patterns. Here, our focus is upon industrial stock price indices. We investigate (1) whether or not an industry can be classified according to its stock price volatility--i.e, whether a series of volatility statistics, each computed for a relatively short time span, will be fairly constant for individual industries over time, and (2) if inter-industry volatility differentials remain constant over time. Part I presents a brief discussion of general issues related to the topic of volatility. Part II summarizes the computational models, and Part III presents the empirical results yielded by the industry study. Part IV summarizes our findings. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to analyze the response of the demand for each asset available in the market to changes in the estimates of some of the above parameters. This analysis is of crucial importance in understanding the investors' behavior and the allocation of resources among industries. [ABSTRACT FROM AUTHOR]

The effects of diversification on portfolio efficiency have been examined extensively over the past decade since the pioneering works of Markowitz, and later Sharpe and Lintner. The great majority of the empirical work has been limited to common stocks in the U.S. capital market. Recently papers have begun to appear examining the merits of diversifying across international boundaries. The purpose of this paper is to examine several theoretical implications of such international diversification, with particular attention to the effects of imperfections in international financial markets on risk premia for capital assets, the cost of capital to firms, and the efficiency with which capital is allocated. [ABSTRACT FROM AUTHOR]

The modern theory of portfolio selection dichotomizes the decision-making process: the investor in risky assets first isolates the efficient set of alternative portfolios independently of his personal tastes; in the second stage he chooses the optimal risk portfolio out of the efficient set in accordance with his preferences. Since the theory is set out in terms of ex ante values, a high degree of uncertainty attaches to the input variables of the portfolio model. These variables relate to the shapes of the probability distributions of future returns on securities, to their expected values, to their variances and to the possible interaction among security returns, that is, to their covariances as well. This paper is concerned with testing the predictive ability of the first stage, that is, of the efficiency analysis, using four alternative efficiency criteria. [ABSTRACT FROM AUTHOR]

The article discusses performance attribution for portfolios of securities. Previous work by other writers has often focused on the relationship between securities' risk and returns. The current paper seeks to determine the proportions of a portfolio's return that are due to skillful selection (selectivity), and the general upward trend of a market (timing). Modern capital theory is employed to both measure risk and define a benchmark, "naively selected" portfolio. The author emphasizes single-period returns, although multiple periods are discussed as well.

The concept of risk has so permeated the financial community that no one needs to be convinced of the necessity of including risk in investment analysis. Still of controversy is what constitutes risk and how it should be measured. This paper examines the statistical properties of one measure of risk which has had wide acceptance in the academic community: namely the coefficient of non-diversifiable risk or more simply the beta coefficient in the market model. [ABSTRACT FROM AUTHOR]

The article presents commentary on a paper written by G. Heberton Evans, Jr. entitled "The Theoretical Value of a Stock Right," which was published in the March, 1955 issue of the "Journal of Finance." In that paper Evans presented a method for valuing stock rights that he considered to be an improvement over the traditional approach. The author argues that Evans' assumptions concerning how investors use traditional valuation methods are false, and that Evans has failed to justify why investors should prefer his method.

The article reports on the effect of alternative accounting rules for nonsubsidiary investments and discusses the paper, "The Effect of Alternative Accounting Rules for Nonsubsidiary Investments," by Nicholas Dopuch and David F. Drake. The author feels that empirical research in accounting is difficult because there is insufficient data available for reliable statistical information. In the sampling of firms for Dopuch and Drake's research they omitted the Corning Glass Company which owns 30% of the Owens-Illinois Glass Company, which was included in the sample.

ABSTRACT Cash management in a life insurance firm requires knowledge of the probability distribution of the cash outflow for mortality. In this paper, a model of an insurance portfolio is used to derive this probability distribution. The problem of obtaining the requisite data for constructing the probability distribution is discussed. The paper ends with a discussion of the use of the probability distribution in a cash management application. [ABSTRACT FROM AUTHOR]

The author comments on the article "Security Prices, Risk and Maximal Gains from Diversification," by professor John Lintner, concerning a complete general equilibrium model of security price determination under risky conditions. He states that while Lintner's model supersedes his, he believes that some differences between Lintner's results and his own are more apparent than real. He mentions that Lintner and he agreed about efficient portfolios of securities except for differences in the choice of axes to represent the two measures. He states that the main issue of difference is the appropriate measure of risk and suggests that differences can be attributed to the implications drawn from his paper's partial equilibrium analysis and Lintner's general equilibrium analysis.

The article presents a response from Roman L. Weil, Joel E. Segall, and David Green, Jr. (WSG) to various critics who commented on their paper entitled "Premiums on Convertible Bonds," which was published in the June, 1968 edition of the "Journal of Finance." They acknowledge the validity of some of the criticisms made by David Duvel, but not all. They substantially disagree with commentary from Glen Mumey and J. Phillip Cooper. Owing to the volume of responses their paper attracted, though, they have decided to rerun their data and publish updated findings.

The purpose of this paper is to analyze the provocative proposition of substituting for investment life insurance a program of term insurance and separate investment. The approach is to calculate an expected-return equivalent, that is, the rate of return net of taxes and investment expenses that one would have to expect from a separate investment fund plus term insurance over some duration, such as twenty or thirty years, in order to attain at least the equivalent of the performance of investment life insurance, taking into account the probability of persisting in either scheme and the time value of money. [ABSTRACT FROM AUTHOR]

The article focuses on several books on general management. Some of these are as, "Doing Business Abroad," by Henry Landau; "Private Investments Abroad," by Matthew Bender; "The International Operations Simulation at the University of Chicago," by Hans B. Thorelli; "Papers on International Trade," by George W. Stretch; "Industrial Spying Goes Big League," et al. The first book is a collection of papers on incentives and obstacles to investment, taxes, local business organizations, laws and litigation in a number of foreign countries. Also U.S. tax considerations, base companies in selected countries, and licensing while in the second book papers presented at the third annual institute on private investments abroad sponsored by the Southwestern Legal Foundation.

Statistically, a beta coefficient is the slope coefficient of a linear function relating the return on a security or portfolio to the return on a market index. Substantial interest has focused on beta coefficients because of hypothesis suggesting them as indices of asset risk. This concept arises from two sources: the market model developed in Sharpe as a technique for portfolio analysis; and, the full equilibrium Capital Asset Pricing Model developed in Sharpe, Lintner, and Mossin. Recently in this Journal, Marshall Blume reported results of an empirical investigation of the stationarity of beta coefficients over time. In investigating this question, Blume estimated portfolio betas using monthly data over several successive seven year periods, and comparing the betas on successive intervals. His results indicated that beta coefficients were highly stable for portfolios containing large numbers of securities but unstable for individual securities. The present paper presents results of research which investigated the impact of the length of the estimation interval on stability of the beta estimated. Using monthly data, betas were estimated using estimation intervals of one year, two years, four years, six years and nine years. The results indicate that the stability of the beta increases substantially as the length of the estimation interval increases. [ABSTRACT FROM AUTHOR]

The article focuses on employee turnover measurement and human resource accounting. Human resources accounting, which was pioneered in a joint project between the Graduate School of Business Administration and the Institute for Social Research at the University of Michigan, has great appeal but because of practical application problems has not been widely implemented in organizational practice. In a similar way, turnover costing has been attempted by many people in many ways, but most attempts at it seem to result in works of accounting fiction. Of the two, turnover measurement and costing is perhaps the lesser developed conceptually and this paper addresses to that problem. The surest route to making full practical sense out of both the notions of human resource accounting and turnover measurement and costing is thus to integrate the two into one system. The depreciation of any business investment must be determined by reference to the probable life expectancy of that investment. The life expectancy of any human developmental investment will frequently best be defined by reference to the average position tenure of a specific job as determined from measurements of acceptable position turnover for the position to which that investment contributes.

Patric Hendershott has argued recently that Irwin Friend and Stephen M. Goldfeld and Dwight M. Jaffee have much exaggerated the extent to which the asset-liability structure of savings and loan associations creates for associations a serious propensity for "disintermediation" of savings deposits when money and capital market interest rates rise sharply. Friend, Goldfeld and Jaffee, and others have taken the position that because savings and loan associations emphasize long-term, relatively immarketable mortgage assets but short-term savings deposit liabilities the yields they pay on savings deposits are inflexible upward relative to yields on competing assets. Therefore, when money and capital market interest rates rise sharply, net inflows of savings deposits are likely to be severely disrupted. Total savings deposits may even decline. Friend has argued that this "asset-liability structure problem" is important enough as a source of liquidity problems for savings and loan associations and cyclical instability for the home construction industry to make substantial changes in the regulatory framework which determines savings and loan association asset-liability structure desirable. Goldfeld and Jaffee [4, p. 631] find in the problem the rationale for the role of the Federal Home Loan Banks and Board as lender of last resort to the savings and loan association industry, a point with which Hendershott takes explicit issue. While Hendershott's paper is primarily theoretical, he does offer some empirical support for his view. The purpose of this comment is to argue that this empirical support is not persuasive. [ABSTRACT FROM AUTHOR]

If investors wish to maximize the probability of achieving a given level of wealth within a fixed time, they should choose the "growth-optimum" portfolio; that is, the portfolio with highest expected fate of increase in value. This paper has examined the implications for observed common stock returns of all investors selecting such a portfolio. Given some widely-used (and useful) aggregation assumptions, the growth-optimum model implies that the expected return ratio E[(1 + R[sub j])/(1 + R[sub m])] is equal for all securities. This implied equality of expected return ratios was utilized in analysis of variance tests with New York and American Exchange listed stocks from 1962-1969 in order to ascertain the basic validity of the growth-optimum model. The model was well-supported by the data. The growth-optimum model was compared algebraically to Sharpe-Lintner theory, which is probably the most widely-used portfolio result in empirical work. A close correspondence was demonstrated between their qualitative implications. For example, both models imply that an asset's expected return will equal the risk-free interest rate if the covariance between the asset's return and the average return on all assets, Cov(R[sub j], R[sub m]), is zero. For most cases, the growth-optimum model also shares the Sharpe-Lintner implication that an asset's expected return will exceed the risk-free rate if and only if Cov(R[sub j], R[sub m]) > 0. There are, however, some cases of highly-skewed probability distributions where this implication does not follow for the growth-optimum model. A close empirical correspondence between the two models was demonstrated for common stock returns. The procedure (1) estimated returns and risk premia implied by the two models from time series; (2) calculated cross-sectional relations between estimated returns and risks; and (3) compared the cross-sectional relations to the theoretical predictions of the two models. They could not be distinguished ... [ABSTRACT FROM AUTHOR]

The purpose of this paper is to acquaint the reader with psychology's recent endeavors to answer this general question. Along the way we shall touch on a number of related topics, including studies of the accuracy and reliability of judgment; techniques for modeling the judgment process and making intuition explicit; biases in judgments of probability, variability, and correlation; experimental studies of risk-taking behavior; and discussion of the relative merits of scientific versus intuitive approaches to making judgments and decisions. Wherever possible, implications of this work for investment decision making will be noted. If, as we proceed, we expose some warts, prejudices, and twitches, it is done in the belief that a full understanding of human limitations will ultimately benefit the decision maker more than will naive faith in the infallibility of his intellect. [ABSTRACT FROM AUTHOR]

The article presents a response from Henry A. Latane and William E. Young (L&Y) to concerns raised by Irwin E. Jones, P.L. Cheng, and M.K. Deets about L&Y's article "Test of Portfolio Building Rules," which appeared in the September, 1969 edition of the "Journal of Finance." Specifically, L&Y address claims that their paper improperly used overlapping holding periods in measuring portfolio returns, and that they misinterpreted the advantages of portfolio diversification. L&Y present data and arguments to defend their work.

It is a common place to describe the capacity of a person to command marketed goods and services generally as wealth. In a monetary economy the significant measure of wealth is the money's worth, or sum of the market prices if sold, of a person's possessions. The things one legally possesses may take varied forms; we say that wealth has been invested in these forms. The forms in which one's wealth is held are a consequence of choice, whether choice is exercised by analysis and deliberation or by simple inertia. The evidence of choosing lies in the investments we make. These are observable, and they are often capable of being understood, even by an observer, in terms of the information available to, and the expectations and preferences of, investors individually. The purpose of this paper is to demonstrate the relevance and coherence of the informative, appraisive and evaluative processes of investment choice. The resulting system of ideas incorporates in embryo all the basic features of investment decisionmaking in a real-world context. [ABSTRACT FROM AUTHOR]

The article presents commentary about a paper written by Roman L. Weil, Joel E. Segall, and David Green, Jr. (WSG) entitled "Premiums on Convertible Bonds," which was published in the June, 1968 edition of the "Journal of Finance." In that paper WSG explored to what extent bond premiums could be explained or predicted by available data. The author of the current paper notes that one factor omitted by WSG is investor expectations for the stock underlying the convertible. He offers empirical analysis supporting the effectiveness of this measure.

This paper is addressed to individuals engaged in research on portfolio management or investments. It has been prepared with two purposes in mind. The first is to describe a number of problems encountered in connection with the recommendation that the degree of risk assumed in a portfolio be measured as an important aspect of the portfolio's investment performance--a recommendation contained in the Bank Administration Institute (B.A.I.) report on pension and profit-sharing fund performance measurement [7]. The second is to identify some possible trends in future research on measuring the risk dimension of investment performance and to comment on the prospects of alternative lines of investigation. It is hoped that this material will contribute to development of the improved risk measurement methods advocated in the Institute's report. [ABSTRACT FROM AUTHOR]

This article looks at the results of a study which tests a theory of investment's ability to explain the annual investment of a firm. The theory assumes that an individual or firm desires security in addition to income, maximizing expected future incomes that are subject to the constraint that an acceptable level of security is met or maintained. It is assumed that the firm's debt-equity ratio is used as a measure of risk. A significant correlation was found to exist between investment and profits prior to depreciation. The author concludes that either firms are influenced by the desire for security or levels are determined by profitability of investment.

The article focuses on the relationship between the firm internal rate of return (IRR) and the IRR of firm projects. The methodology utilized by prior researchers who have studied the relationship between the firm accounting rate of return (ARR) and firm IRR assumed that firm IRR is equal to the IRR of firm projects. The study found that when the growth rate in gross investment is greater than or equal to the IRR of firm projects then the IRR of the firm is not equal to the IRR of firm projects. The article examines the relationship between firm ARR and firm IRR, and attempts to define firm IRR in order that accurate measurements of that will be available to future researchers.

The article focuses on the allocations in accounting. The authors discuss the implication of formulating the allocation problem under uncertainty and the use of traditional allocation schemes. The authors state that the few examples displayed in the article indicate that this bias may be significant in the sense that the objectives of the allocation scheme may not be achieved. The article also discusses the basis of the net realizable values. The authors conclude that much more exploration into the properties of allocation methods is still needed. [ABSTRACT FROM AUTHOR]

Comments on an article by Daniel P. Kedzie concerning corporate planning and the importance of a holding company. Decision of major insurance firms to establish holding companies; Lack of arguments with respect to the dangers of broadening market activities; Analysis of the return on investment of the insurance industry.

The article presents criticism and commentary on the report "Some Basic Research into Historical Results Under Pension Plans With Stock Benefits Based on Common Stock Performance," by John C. Antliff and William C. Freund, included within the issue. The article's primary advocacy for the use of common stocks as long-term investment instruments is reviewed and supported. Specific comments are also offered citing several logistical obstacles to the implementation of the thesis, centering on the cost and attitude changes needed for insurance companies to benefit from the theory.

The article presents a response from E. Norman Bailey to commentary from Yutaka Imai and William Nelson (I&N) about his paper, "The Erroneous MEC Function," which appeared in the December, 1970 edition of the "Journal of Finance." Bailey asserts that I&N's criticisms were not germane to the specific issue addressed in his paper. He also believes their arguments embraced circumstances not commonly found in practice. Overall, in his view, I&N's presentation amounts to a tautology. He concludes by noting the irrelevance of a firm's marginal efficiency of capital function at the operational level.

This paper has two purposes. The first is to introduce risk into the macro investment equation of pension funds and life insurance companies and the second is to investigate whether the two moment model is sufficient to explain their investment behavior. Part I is concerned with developing a framework within which the two variables of the model are included in the investment equations of two types of securities: corporate bonds and corporate stocks. Part II deals with the hypothesis and the prior specification of the model. In Part III the regression results for life insurance companies, for noninsured pension funds, and for state and local pension funds are introduced and analyzed. The findings show that risk is highly significant in the equations regressed. In addition, the model provides a good description of the investment behavior of the institutions investigated, and the results indicate that the two moment model is sufficient to explain their behavior. [ABSTRACT FROM AUTHOR]

The problem of whether to bind, microcopy or discard back issues of journals in a university library branch system is considered and an algorithm is developed to solve the journal disposition problem. A cost-effectiveness approach is pursued, employing an analytical model. This model uses a set of weighted factors to quantify the value of a specific journal to the library. Such factors as relevance, usage, availability elsewhere and capital investment are specified. Budget constraints, which involve the relevant costs of binding and microcopying, are considered, as are upper and lower threshold values on the worth of a journal to guarantee the retention of exceptionally good journals and the disposal of very poor ones. An example based on data from a real university special library situation is presented as an illustration of the model. Thus, this paper extends the work of others in modeling of the library collection development decision process. [ABSTRACT FROM AUTHOR]

ABSTRACT With the introduction of equity products by life insurance companies, investor attitudes will become increasingly important. This paper attempts to add to the theory of insurance consumption by analyzing such investor attitudes. The data indicate that investors have substantially different attitudes toward various investment media. In the ease of several media, the attitudes of annuity-prone and annuity-moderate investors are very similar. However, there are significant statistical differences between the groups in their attitudes toward five important types of investments. These data also show significant differences in attitudes toward anti-inflationary portfolio policy. The conclusions drawn from these data may be especially important in relation to the equity products of life insurance companies and there are implications for the more traditional life insurance products as well. [ABSTRACT FROM AUTHOR]

SUMMARY This paper deals with several issues related to the impact of import substitution on a country's demand for imports. With the help of a simple model, it points out that once a given rate of growth has been reached and is maintained through time, the fact that investment expenditures have a high import component will not give rise to balance of payments difficulties, as the direct impact of this year's investment on the demand for imports should be more than offset by last year's investment in the import substituting industry now coming to fruition. The pressures on the balance of payments will arise during the transition period when a country is attempting to step up capital formation in the import substituting sector. The paper also emphasizes the need to take into account all direct and indirect repercussions of an increase in investment on the demand for imports when estimating the foreign exchange savings to be realized from a given investment project. The second part of the paper considers the likely effects of a change in the relative prices of imports on the manufacturing sector producing goods previously imported, but which still relies on imported raw materials and intermediate products, and on the demand for imports. Several reasons are given for a presumption against a high price elasticity in the demand for imports, based on the derived nature of a large component of such demand. Given these structural conditions the alternatives open to a policy maker in a semi-industrialized country facing the need to cut back imports are likely to be quite grim. [ABSTRACT FROM AUTHOR]

The analysis of expenditure on research and development within the individual enterprise is a particularly difficult operation. There are three distinct but related problems. The first is the proportion of the firm's total budget which should be allocated to pure research and development and the division between them. The second is the choice between particular projects in any given period. A third problem, an implicit subsidiary of the second, is to decide on the cut-off point for any project, that is, the point at which it should be eliminated from the research programme. The difficulties arise for a number of reasons which are inherent in the conditions surrounding the decisions. It is unknown how the amount of innovation is associated with the amount of expenditure, whether for example there are diseconomies of scale in research. For individual projects the prospective yields are unknown and the costs open-ended. The problems are made the more difficult because of conceptual hazards in seeking to distinguish between pure and applied research and between research and development. This paper is largely concerned with one aspect of the whole question, viz. with the means of balancing the demand for funds within the firm for research and development with the supply of such funds. Methods are suggested for the allocation of funds between projects (i) on the assumption that managers are able to quantify the returns from research; (ii) on the assumption that they cannot or prefer not to quantify but will give a clear ordinal ranking. [ABSTRACT FROM AUTHOR]

Our objective in this paper is to determine the rate of discount for public investment which is optimal on efficiency grounds, given that
1 We are indebted to Giorgio Basevi and Henry Tulkens for reading the manuscript of this paper and making useful suggestions. We also thank Maurice Marchand, Jan Mossin and David Newbery for valuable comments and criticism.
2 References in square brackets are listed on pp. 411-12, below.
there exists a wedge between the marginal rate of time preference and the marginal productivity of private capital (due, for instance, to the corporation income tax). This is an exercise in the theory of second-best welfare economics. We shall first analyse the problem for a closed economy. Then we shall extend the discussion to an open economy to allow for foreign lending and foreign direct investment. In Section VII we provide some numerical illustrations of our main conclusions. [ABSTRACT FROM AUTHOR]